THE COLOR OF MONEY
Authors call middle-income U.S. families 'losers in economic game'

By Michelle Singletary

You would think if you are a two-income family, living in a nice home in a good neighborhood, that you've arrived. You've done what it takes to achieve middle-income status and you should be OK, right?

But what you may have done is fall into a two-income trap.

Two researchers have found that millions of middle-income families are only breaking even or are in deep financial trouble.

In "The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke" (Basic Books, $26), authors Elizabeth Warren and Amelia Warren Tyagi conclude that earning two incomes doesn't guarantee financial security.

"Over the past generation, the number of American families who have found themselves in serious financial trouble has grown shockingly large," the authors write. "In a world in which our neighbors seem to be doing fine and the families on television never worry about money, it is hard to grasp the breadth or depth of financial distress sweeping through ordinary suburbs, small towns and nice city neighborhoods."

Consider these statistics reported in the book:

• In the past 25 years, the number of families in bankruptcy has increased 400 percent, and housing foreclosures are up 350 percent.
• The average middle-class family can no longer buy a home without putting both husband and wife to work.
• Parents with young children are more than twice as likely to go bankrupt than any other segment of the population.
• More than 90 percent of those in bankruptcy would qualify as middle class.

If these trends continue, the authors contend, more than 5 million families with children will file for bankruptcy by the end of this decade.

"That would mean that across the country nearly one of every seven families with children would have declared itself flat broke, losers in the great American economic game," Warren and Tyagi write.

Elizabeth Warren is a bankruptcy expert and professor at Harvard Law School. Her daughter, Amelia Tyagi, co-founded HealthAllies, a firm specializing in healthcare benefits.

The women interviewed nearly 2,000 middle-class families across the country. The stories of how these families are struggling are illustrated throughout the book.

The researchers point out that long before a disaster struck — a job lost, illness or divorce — the families were already vulnerable.

But contrary to popular belief, middle-income families aren't squandering their second incomes on luxuries. They are financially fragile because so much of their double income is devoted to mortgages for homes bought in a shrinking number of desirable school districts. The rest of their money is being used to cover health insurance, preschool and college tuition, and to pay the loan on a second car.

The sad truth is the modern two-income family earns 75 percent more income than the one-income family of a generation ago, but has less discretionary income.

So, is there a way out of this two-income trap?

Families have to conduct a financial fire drill, the authors suggest.

"Any firefighter will explain that the time to prepare for an emergency is before the house catches on fire," they write.

This advice also holds true for your financial house. Here are three key questions Warren and Tyagi say you should ask yourself:

• Can you survive without one income for six months? The average two-income family faces a 1-in-16 chance that in any given year, at least one wage earner will lose a job. If you're a middle-income family and there is a stay-at-home parent, could that parent enter the workforce if the one earner loses his or her job?
• Can you cut fixed expenses? Is it possible to find a lower-cost preschool for your toddler? Maybe you need to buy a less-costly home. Remember that an oversized mortgage may leave you really strapped if your income is reduced.
• Do you have a backup plan? An "emergency backup plan may cause you to rethink some of your financial commitments," Warren and Tyagi write. For example, they advise families to get short-term car loans. Choose a 36-month car loan instead of a 60-month commitment. "If that drives the payment up too high, then heed the warning: You cannot afford this car."

If you're already in trouble, Warren and Tyagi also offer some sound, albeit, tough advice. For instance, you may have to let a lender repossess your car to hold onto your home.

"The Two-Income Trap" is a bogeyman story but it ultimately doesn't leave you without hope. It should give you a sobering perspective on what it might take to hold on to your middle-income life.